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Why Snap is more like Twitter than Facebook

Evelyn Cheng
Updated

Snap (NYSE: SNAP) is more like Twitter (NYSE: TWTR) than Facebook (NASDAQ: FB), according to exclusive analysis of credit scores from S&P Global Market Intelligence.

Just ahead of its high-profile initial public offering a few weeks ago, the Snapchat parent has an implied credit score of b, the same as Twitter had ahead of its IPO, the S&P analysis showed. In contrast, Facebook had a credit score of bbb+ ahead of its IPO.

Compared with Facebook, "Snap is much earlier in their growth cycle and profitability, and that's very much impacting the credit model on the firm," Jim Elder, director in the risk services business at S&P Global Market Intelligence, told CNBC.

Source: S&P Global Market Intelligence CreditModel, March 2017.

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S&P generates the credit scores using its CreditModel tool, which simulates the credit ratings that S&P Global Ratings uses to determine how likely a company can default on its debt. For Snap, S&P calculated the company has a nearly 1 in 20 chance of default, hence the b score.

A major reason for the low score is Snap's negative 45.02 percent return on capital, S&P said. That contrasts with Facebook's pre-IPO return on capital of positive 27.7 percent.

Twitter went from a return on capital of negative 15 percent ahead of its IPO to negative 4 percent most recently. Its credit score is bb-.

The model doesn't factor changes in stock prices. So the fact Snap shares are down 25 percent from their recent peak or up nearly 12 percent this week doesn't affect S&P's model.

The key for Snap to improve its credit score, then, is improving a key element that shareholders are looking for — profitability.

Disclosure: CNBC parent NBCUniversal is an investor in Snap.



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